This study investigates the unintended consequences of China's centralized drug procurement policy on non-winning drugs. Utilizing drug-level data, we employ a Propensity Score Matching combined with Difference-in-Differences (PSM-DID) methodology to assess the impact of the centralized procurement policy on the prices, usage, and revenue of non-winning drugs. Our findings reveal that, relative to winning drugs, non-winning drugs experience significant increases in price, usage, and revenue following the implementation of the centralized procurement policy. This result suggests that the policy induces a substitution effect on the demand for non-winning drugs through the transfer of pharmaceutical kickbacks and changes in physician prescribing preferences, thereby partially offsetting the policy's intended cost-containment objectives. Placebo tests and a series of robustness checks support the causal interpretation of these findings. Furthermore, heterogeneity analysis highlights that high-profit, low-usage frequency, complex formulations, and specialized therapeutic category drugs exhibit more pronounced increases in prices and revenues under the policy. Theoretically, this research extends institutional theory by illustrating how partial market regulation influences unregulated segments through strategic corporate responses, and integrates strategic management insights to elucidate firms' adaptive strategies in dynamic policy environments. Empirically, the study fills a critical gap in the literature regarding the spillover effects of centralized procurement policies. Our results provide valuable empirical evidence and theoretical support for policymakers aiming to optimize centralized procurement strategies and deepen reforms in the pharmaceutical sector, emphasizing the necessity of considering unintended consequences to ensure fair competition and efficient resource allocation in healthcare markets.
